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As the project to converge U.S. and international accounting standards reaches what could be considered a midway point, cracks in the process are starting to show.

In fact, Financial Accounting Standards Board chairman Robert Herz spent the better half of last week assuring the public that his board’s convergence project with the International Accounting Standards Board is moving along smoothly — and regulators need not interfere by pushing for proposals that could possibly hinder its progress.

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Speaking at a Senate hearing and an industry panel, Herz conceded that the pressure to complete the project has increased recently, particularly the market pressure. Businesses have stepped up efforts to raise capital across borders, and more countries — including Australia, Canada, and Japan — have announced plans to eventually switch to International Financial Reporting Standards.

To be sure, amid all this change, observers have marveled at the speed with which FASB and the IASB began to eliminate the differences between U.S. GAAP and the IFRS following an agreement to do so in 2002. However, the project could have at least five more years to go, Herz said Thursday.

The general agreement among business executives that globalization is inevitable has now led to questions about when one common global set of accounting standards will be ready for use by both U.S. and European companies. And worries about the competitive status of the U.S. capital markets recently prompted the Securities and Exchange Commission to release two proposals that raise the possibility that companies listed on U.S. exchanges could file their IFRS-prepared financial statements without having to reconcile them with GAAP.

The fact that the proposals are being presented now doesn’t sit well with Herz, who worries that they could interfere with the success of a completed convergence project. The project aims to create one set of high-quality standards that would incorporate improvements to both GAAP and the IFRS, giving investors the ability to more easily compare the financials of companies on both sides of the Atlantic Ocean. That ultimate version will be the IFRS, and not GAAP, Herz has said.

While he’s not against the SEC’s proposal to eliminate the reconciliation requirement for foreign private issuers, Herz is concerned with what such a proposal will likely lead to: the SEC giving U.S. companies a similar choice and creating a dual accounting system. In fact, the SEC has raised the dual-system idea in another proposal that asks the public for their thoughts on the matter without actually proposing that the change occur. Some comment letters to the SEC on the reconciliation proposal suggest that Europeans would view the elimination of the reconciliation requirement as a death knell for convergence.

“We do not support permitting U.S. companies a choice between IFRS and U.S. GAAP for any extended period of time,” Herz said during a Senate hearing on Wednesday held to discuss whether the SEC is rushing its IFRS-related proposals. “Rather, we believe it would be preferable to move all U.S. public companies to an improved IFRS over a transition period of several years.”

During a Webcast hosted by RiskMetrics Group, Herz again touted his new idea to create a blueprint that would accelerate the convergence project and outline target dates for moving the U.S. financial-reporting system to an IFRS-based system. As it is now, the standard-setters have no set deadline for finishing the project. “I personally believe that if everything went completely smoothly, the minimum time [to complete convergence] would be a minimum of five years,” he said.

But the SEC may not be patient enough to wait for Herz’s plan to take hold, as the commission has already proposed eliminating its reconciliation requirement by 2009. The SEC’s intentions will become clearer later this year after staffers finish poring over more than 100 public comment letters it received on the reconciliation proposal.

For now, practical issues stand in the way of expanding the IFRS outside of Europe’s borders. For example, in the past week Herz and ISAB counterpart David Tweedie have noted that there are at least 10 major accounting issues that must be ironed out before a global set of standards is ready, including snags with lease and pension accounting, as well as revenue-recognition issues. Plus, education for future accountants will have to change, and the CPA exam will likely need to be modified. In addition, the future stability of the IASB is in question, as it currently receives voluntary contributions (compared with FASB, which receives funding from SEC registrants’ fees).

Many unanswered questions also remain: Will private companies need to start using a modified version of the IFRS? How will state laws and securities regulations tied to GAAP have to be changed? How will the use of XBRL, the interactive data language touted by the SEC as the future of financial reporting, be affected?

Other hindrances could lie with the European Commission’s protests against the IASB’s version of the IFRS, as well as the various modified versions of the IFRS that are popping up in Europe. “Our mission fails completely if that’s tolerated and it’s allowed to continue,” said IASB member James Leisenring during the Webcast. Meanwhile, the SEC’s proposal specifies that it would eventually accept only those financial statements that are prepared using the IASB’s version of the IFRS.

Currently the two standard-setters continue to chip away at rules that are difficult to converge. Leisenring admitted that the process has not been easy as both boards have had to overcome their cultural differences amid pressure by regulators, businesses, and investors that are torn between the European tradition of more principles-based standards and the American reputation for relying on more rules-based standards.

“As we’ve debated the issues in the past four to five years, it’s never come down to one board feeling one way and another board feeling another,” he said. “It’s usually individuals on both boards feeling one way and individuals on both boards feeling another.”